Is Macau E&M Holding (HKG:1408) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Macau E&M Holding Limited (HKG:1408) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Macau E&M Holding

How Much Debt Does Macau E&M Holding Carry?

The chart below, which you can click on for greater detail, shows that Macau E&M Holding had MO$12.6m in debt in June 2024; about the same as the year before. But it also has MO$130.1m in cash to offset that, meaning it has MO$117.5m net cash.

How Strong Is Macau E&M Holding's Balance Sheet?

According to the last reported balance sheet, Macau E&M Holding had liabilities of MO$32.4m due within 12 months, and liabilities of MO$12.1m due beyond 12 months. Offsetting this, it had MO$130.1m in cash and MO$75.4m in receivables that were due within 12 months. So it actually has MO$161.0m more liquid assets than total liabilities.

This surplus liquidity suggests that Macau E&M Holding's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Macau E&M Holding has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Macau E&M Holding will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Macau E&M Holding had a loss before interest and tax, and actually shrunk its revenue by 5.3%, to MO$117m. We would much prefer see growth.

So How Risky Is Macau E&M Holding?

Although Macau E&M Holding had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of MO$7.5m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Macau E&M Holding you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.